Quarterly Strategy Update: Emerging Markets Equity with ESG exclusion

 

 

 

Good morning,

In January the VanEck Emerging Market Equity strategy outperformed with 2.58%. On a 10 year basis outperformance vs the benchmark is 4.13% annualised before fees

With 29 years of experience on the clock, Semple has experienced just about everything in emerging markets, but his central philosophy, he says, has never changed. “It's all about structural growth. I avoid cyclical businesses. Yes, they sometimes have their moment in the sun - that is why we call them cyclical - but it is not possible to time when such a moment starts or ends. "

Many investors in China in particular are too tempted to trade on the basis of current events and trending topics, says Semple. “Institutional investors in China have an enormously high turnover in their portfolios, they are more like immature hedge funds. You will never hear me say that we "surf on a wave." We buy structural growth at a good price. If you now sketch me a random market environment, I will tell you exactly how our fund will perform in that market. That's how predictable it is. "

Current news in China is of course dominated by the corona virus, which disrupts public life and the economy in entire regions. Surely that should be a concern even for an investor with a structural perspective? “Yes, it is very radical and to be honest, I am surprised how strongly the markets are holding up. In my eyes, that mainly shows how incredibly much liquidity there is. I am not an epidemiologist, so I cannot predict what will happen next. ”


Part of an interview with Lennart Grootenboer, a dutch journalist from IEX. Please read the full interview at the bottom of this email or by clicking at the right in case you understand Dutch.



Time for EM? 
growth of $1000 last 10y till end of January 2020

Information

 


- Presentation VanEck EME

- VanEck EME versus peers


- Factsheet

- Commentary

- Kiid's


Latest webinar





For the Dutch speaking amongst us:

https://www.iexprofs.nl/Interview/493782/coronavirus/Ik-ben-verbaasd-hoe-sterk-de-markten-zich-houden.aspx?utm_source=intern&utm_campaign=main1_home

 

 

 

 

 

Full Outlook

The outlook for emerging markets equities is reasonably bright heading into 2020. Some of the geopolitical tail risk has diminished (i.e., global trade tensions, U.S. politics, liquidity), although it has certainly not gone away. We are watching carefully to see if corporates respond to more stable conditions with increased capex and credit demand, thus starting a probably modest economic up- cycle. Monetary and fiscal stimuli are expected to continue across both developed and emerging markets (“DM” and “EM”), as global governments have scope to boost domestic demand and supply on their end. We believe that emerging markets economies are on the path to stabilization, partly due to prolonged expansion and shallower recession patterns worldwide.

Going into 2020, we also believe that the U.S. economy will be lessexceptionaland the rest of the world will perform better than the U.S. Unlike in previous year(s), we expect growth to be the main driver of emerging markets equity returns in 2020, therefore pushing quality growth companies with strong fundamentals and solid growth estimates to the front and center in a new decade of economic transformation. We also find EM valuations to be relatively cheap versus DM. For example, companies on our focus list are reporting solid numbers and are relatively cheap versus historical estimates or current DM valuations for our anticipated operating profitability growth. Their balance sheets are in good shape, generating strong cash flows over a three- to five-year time horizon. With the emphasis on growth to drive returns, we believe that emerging markets equities are well positioned to take advantage of this positive market sentiment and outlook!

The VanEck Emerging Markets Equity Strategy identifies companies with a structural growth at a reasonable price (“S GARP”). Persistent long-term structural growth opportunities exist in emerging markets. These opportunities are poorly captured by widely used benchmark indices. High growth is frequently overvalued and value stocks often remain cheap. Therefore, we believe achieving strong returns in emerging markets requires an experienced team using a disciplined approach to uncover structural growth at a reasonable price.

 

 

Historical Market Capitalization Allocation - %

 

 

 

Market review

As the quarter (and year) drew to a close, we started to see a move towards resolution of the U.S./China trade debacle, albeit that matters were really getting down to the wire, especially as the final (threatened) set of tariff goods were very consumption- oriented.

Looking at some of the countries in which we invest, in India, there are still no actual signs yet that the economy will pick up—only the hope that it will. There is no doubt that the politics surrounding citizenship reforms were poorly handled and the ensuing mess did not help sentiment. In China, there was less stimulus domestically in the final quarter of the year and the effect of some of the prior stimulus has lagged in its impact. The country continues to face a difficult situation in Hong Kong, albeit that events there have somewhat dropped out of the headlines. In Brazil, there continues to be a deal of political noise, but this remains pretty typical of the country’s politics. President Jair Bolsonaro’s agenda, however, remains market- and business-friendly. Finally, it is probably worth mentioning Turkey. Whilst some of the country’s long-term structural issues have still to be resolved, inflation is down, rates are down and the currency is improving. So, there is a least somemendinggoing on.

Fund review

The Fund continued to perform well during the fourth quarter of the year despite discouraging macro and political backdrops. The Fund’s traditional overweight allocations to growth and size factors hurt the Fund’s relative performance, as both value and large caps outperformed growth and small caps in emerging markets during the quarter. On a country level, stocks from Germany (see explanation below) Indonesia and Thailand contributed the most to the Fund’s relative performance, while issuers from Taiwan, China and South Africa detracted the most. On a sector level, exposures in the industrials, energy and utilities sectors helped the Fund’s performance on a relative basis, whereas consumer discretionary, information technology and health care detracted the most.

Top Performers

The top contributors to returns during the quarter came predominantly from China. Chinese property management company A-Living Services (3.2% of Fund net assets*) benefited from further recognition not only of the sustainability of its earnings and the good use to which it has been putting its cash, but also the soundness of the industry in which it operates. It continues to add property management projects, including through third-party acquisitionsand has proven that accretive M&A expands the opportunity set.
The property market in China continues to appear to be fine. Alibaba Group Holding (6.2% of Fund net assets*) continues to execute well andfire on all cylinders.” This includes not only its payment operations, but also its off-line businesses such as logistics. In addition, as the quarter ended, people not only became more relaxed about “China,” but also had mildly better expectations for the economic growth. Delivery Hero (1.8% of Fund net assets*) is food delivery service listed in Germany. While the company does have a footprint in Germany itself, most of its business is based in emerging markets (where it is market leader in a number of countries), including the Middle East. In the final quarter of the year, the company did, indeed, produce “heroic” performance. There is now better appreciation that the company’s current level of investment will bear fruit. In the fourth quarter, it undertook a very positive deal in South Korea, resulting in it becoming a leading food delivery player in an important emerging markets country. M&A activity in the sector has also shone a light on just how undervalued it has been. Tencent Holdings (4.6% of Fund net assets*) like Alibaba, benefited from both increasingly benign attitudes towards the Chinese market and expectations for economic growth. In addition, the company saw some potential stabilization of its market share in digital advertising, together with an easier environment around the games approval process. Finally, Brazilian car rental company Movida Participações (1.8% of Fund net assets*) continued to execute well. Rental volumes in Brazil remain strong and those of used car sales through its own stores have increased. The company’s strengthened internal controls and revenue management has helped maximize revenue itself.

Bottom Performers

For ecommerce solutions company Baozun (0.8% of Fund net assets*), a particular concern, and a cause of impatience in the market during the quarter, was that continual investment was pushing better profitability farther into the future. In addition, there were further concerns around the company’s clients taking their ecommerce solutions in-house in due course. During the quarter, UAE hospitals group NMC Health (1.2% of Fund net assets*) faced not only an attack from a short seller, but also aggressively promoted negative market views. Leading Chinese game live streaming platform HUYA (0.6% of Fund net assets*) suffered as it faced the prospect of increasing competition in the short-form video market. Malaysia Airports Holdings (1.2% of the Fund Net Assets*) faced concern about both the contours and timing of the new regulatory framework in which it operates. FinallyAyala Land (2.1% of Fund net assets*) was victim not only of a general weakening in the Philippine stock market, but also economic headwinds. For example, a higher inflation environment which makes a reduction in rates less likely.

 

 

VanEck Emerging Market Equity Composite data                     VanEck EM Equity Fund Facts

Alpha

2.56

 

 

 

ISIN

IE00BYXQSM04

Beta

1.07

 

 

 

Benchmark

MSCI EM IMI

Std Dev

23.29

 

 

 

Bloombergticker

VEMKUI2

UMC

109.63

 

 

 

Currency

USD

DMC

99.15

 

 

 

Asset Class

Equity

Information Ratio

0.38

 

 

 

Region

Emerging Markets

Tracking Error

6.88

 

 

 

Dividend policy

Accumulating

Sharpe Ratio

0.29

 

 

 

 

 

 

Active Share

84.9%

as of 31-12-2019

 

 

 

 

Data as of 31-1-2020 source eVestment

 

Strategy overviewkey features of the fund

Investment Philosophy

VanEck believes in structural growth at a reasonable price, as High growth is frequently overvalued and value stocks often remain cheap.
 

Structural growth
Structural trends in company, sector, and country fundamentals:

  • Persistent, visible, and self-sustaining growth
  • Structural growth can be stock-specific or thematic, and can be driven by sustainable advantage, which is often company management
  • Deemphasizes cyclicality, opportunism, and inefficiency

Growth at a reasonable price (GARP)
The intersection of growth and value investing:

  • Avoids overpaying for obvious expressions of growth where valuations can be elevated, driven by opportunistic foreign investors and momentum driven domestic investors.
  • Avoids value traps that may be found in state-owned companies where significant obstacles inhibit the realization of value in emerging markets due to ownership constraints

Investment Process



Please click here for a more detailed presentation about the Emerging Markets Equity strategy.

 

 

The VanEck Emerging Markets Equity Strategy identifies companies with a structural growth at a reasonable price (“S GARP”). Persistent long-term structural growth opportunities exist in emerging markets. These opportunities are poorly captured by widely used benchmark indices. High growth is frequently overvalued and value stocks often remain cheap. Therefore, we believe achieving strong returns in emerging markets requires an experienced team using a disciplined approach to uncover structural growth at a reasonable price.

 

"I'm surprised how strong the markets are"

From SARS to Corona: David Semple has seen almost everything at the VanEck Emerging Markets Equity Fund in 22 years. His approach has never changed: seeking structural growth and activist investing with a small a.

If we are just a bit used to think index trackers from Think ETF's VanEck, we are sitting at the table with an anything but passive fund manager who has the same logo on his business card.

In fact, David Semple not only calls himself an active manager, but even an activist. “Activist with a small a then. We do not compete with companies, but we do work closely with them. We both need something. " Active investing was originally VanEck's house style, says Semple, who has been part of the emerging markets equity team since 1998.

Old sectors
The VanEck gold fund has been around since the late 60s, the emerging markets fund dates back to the early 90s. It is logical that VanEck's supply now consists of ETFs, says Semple.

David Semple
ETFs are there, we can't live without them anymore. It is a solution for many investors, especially if you want to settle for mild underperformance. And if you are unable to do better as an active investor, you also do not belong in this business. ” But index investing also has a major drawback, says the fund manager. “Indices describe the history. But they don't tell you anything about the future. Economies in emerging markets change character. However, the indices are still dominated by the old state champions, who often make money with raw materials or industrial exports. ”

More consumption
“The growth is often in increasing domestic consumption by an increasingly rich middle class. This growth is not the first to manifest itself at the largest companies. We can hold up to 50% of the portfolio in small and mid caps, because we are looking for the future champions. " Disruption is a theme that plays an even greater role in emerging markets than in the developed world, and that development often comes from below. “Then it pays to actively approach a market. In these countries, innovations often skip entire stages. In one fell swoop they make the move from cash to mobile payment, without people ever having a credit or debit card. ”"Indices are dominated by the old state champions, who often make money with raw materials or industrial exports." So predictable.

With 29 years of experience in emerging markets, Semple has experienced just about everything, but his central philosophy, he says, has never changed. “It's all about structural growth. I avoid cyclical businesses. Yes, they sometimes have their moment in the sun - that is why we call them cyclical - but it is not possible to time when such a moment starts or ends. "

Many investors in China in particular are too tempted to trade on the basis of current events and trending topics, says Semple. “Institutional investors in China have an enormously high turnover in their portfolios, they sometimes resemble immature hedge funds. You will never hear me say that we are surfing on a wave. We buy structural growth at a good price. If you now sketch me a random market environment, I will tell you exactly how our fund will perform in that market. That's how predictable it is. "

Corona effect
Current events in China are of course dominated by the corona virus, which disrupts public life and the economy in entire regions. Surely that should be a concern even for an investor with a structural perspective? “Yes, it is very radical and to be honest, I am surprised how strongly the markets are holding up. In my eyes, that mainly shows how incredibly much liquidity there is. I am not an epidemiologist, so I cannot predict what will happen next. ” “The only thing I can try to estimate is the impact on certain sectors. Industry and the energy sector have been hit hardest. Furthermore, it is difficult to see real impact. Life insurers may eventually be able to benefit from an increase in demand. And then there is the effect of all those people who are forced to stay at home. What are they going to do? Shop online and play video games. So those sectors could even stand out positively in the short term. " "What are the Chinese doing at home? Shopping online and playing video games"

Growth story intact
The epidemic is obviously not good for the big picture. “In a few weeks it will be clearer how serious the situation is. It was already difficult for China to meet economic expectations. And corona has made that impossible, you must now determine. "

"The outcome of the trade war with America also remains an unpredictable quantity, now that it is clear that there is only one person in America who decides what the next step will be." "Anyway, the growth we are looking for is not really influenced by trade with America, but by the large Chinese home market. And that growth story is, despite everything, completely intact," concludes Semple.